Johnny McNamara looks at how improving efficiencies in one area of your personal economy can have a dramatic knock-on effect in the other areas of your financial life.

The Celtic Tiger brought with it unprecedented access to credit facilities, which were gladly lapped up by the Irish public. However, the legacy of poor financial planning from this era is now plain to see.

During this boom, many people found themselves owning multiple rental properties without ever examining how these portfolios should be structured to maximise efficiencies in all areas including cash-flow, tax planning, wealth creation and wealth protection. Now that the economic conditions have changed so dramatically in tandem with a tightening of cash-flow, the lack of planning is having a direct impact on how people are managing their own personal economy and possibly limiting chances to generate future wealth.

Take the example of an individual who has found themselves owning multiple rental properties, but who has never taken the time to put appropriate financial planning controls in place. Poor planning may have resulted in a situation where the individual has to use some of their own money to help cover the cost of owning these properties.

Where an individual owns investment properties, these properties should be selffinancing assets. This means that the money receivable (rent) should be greater than the costs associated with owning the property. If the property is not self financing and you have to contribute some of your own money to cover the costs, it becomes highly inefficient as the money that you will be using will most likely be coming from your salary on which tax has already been deducted.

In such a situation you have not only tied up your wealth in an illiquid asset, but have also created a drain on your cash-flow. In most cases, it is possible to create a situation whereby you can improve your cash-flow position through restructuring the finance arrangements and also ensuring that you minimise any tax liability.

If, through appropriate tax and financial planning, the individual in question can create a situation where the rental properties are now self-financing and possibly providing a surplus income, the whole picture changes.

In this situation, you have now freed up your cash-flow, which allows you to use this money to fund other areas of your personal economy and implement plans to generate future wealth. So what should you do to help develop your personal economy now that you have freed up some of your cash-flow? The answer to this will be different for each individual. However, there are a few fundamentals that all people should look at.

Credit card debt and other short-term debt is a burden that most of us are faced with. This debt is very expensive due to the high rates of interest payable and therefore, clearing this debt should be high on your priority list.

Using the money that you have been able to free up, you can now focus your attention on paying off any short-term debt. By clearing this debt as soon as possible, you can help to free up even more cash-flow, which can in turn be used in other areas of your personal economy.

Once you have managed to clear the short-term debt and have been able to free even more cash-flow, you can now look at clearing longer term debt such as the mortgage on your home. Your home is the most important asset that you own, as it provides shelter for you and your family. Therefore, you should look to remove any threat to this security and as such, clearing the mortgage on your family home should also be high on the priority list. By using the improvement in cash-flow to pay off your mortgage early, you will not only increase your security but could also save but could also save thousands in interest repayments.

There is also an element of long-term planning that needs to be implemented as part of any balanced financial plan, and the area of retirement planning should also be addressed. Many people are currently underfunded in their pension arrangements and while this is not a short-term problem, it is important that you look to the future so that you can enjoy retirement.

Freeing up your cash-flow in one area may enable you to increase pension contributions and help to ensure a secure retirement. By contributing to the pension, you can also take advantage of the generous tax reliefs available and therefore increase your efficiency in the area of tax planning.

As mentioned, each individual will require a different plan to suit their needs. However, you will now see the knock-on effects that improving the efficiency in one area of your finances can have on all other areas of your personal economy. You will also see how the improved efficiency can snowball through your personal economy to save money, improve cash-flow and develop your wealth.

This is just an example of how you can develop and grow areas of your personal economy by maximising efficiency in just one area of your finances.

There are many other areas where efficiency can be improved through sound tax and financial planning, resulting in the same opportunities for growth and wealth creation. You can therefore see how vital it is to take a holistic approach to your financial planning in order to maximise efficiencies in all areas of your finances.

For more information or to arrange an appointment, call McNamara & Associates on 01 230 9000.

Next month, we will look at controlling and managing your personal economy in the event of redundancy.

In This Issue

- 10 Tips for Efficient Credit Control
- Tax Briefs
- Business Briefs
- Legal Briefs
- Redundancy FAQs

Plan to Survive and Succeed in These Turbulent Times

There is little doubt that 2009 will be more difficult than 2008 for all businesses. Owner managers feel under pressure like never before and in a lot of instances feel lonely and isolated and do not know where to look for assistance. Therefore now more than ever before is a time when all owner managers should be stepping back and taking a strategic overview of how their business is positioned. This is not the time to let yourself become totally embroiled in the operational issues of the business. Those who position themselves properly should be looking beyond the short term and taking a view as to how they can benefit out of the opportunities that will be there when the cycle of recession passes on.

Now is the time for you to document your strategic goals and plans for the future and commence working towards the implementation of your strategic plan.

Strategic planning includes targeted actions followed by the implementation of these actions, monitoring of results and comparing the results to the plans. Evidence suggests that individuals and businesses that plan and have clear written goals are much more likely to achieve success. Aim to have SMART goals in place which are:

SPECIFIC Clear and focused
MEASURABLE So you can track progress
ACTIONABLE Where your actions make a difference
REALISTIC Achievable by you not a dream
TIME BASED With a beginning and an end

When setting about the creation of your plan you should cover the following principle issues. Your objectives- personal, business, and strategic.

• Your objectives- personal, business, and strategic
• Your business-existing products and services
• Your business -potential products and services
• Your business- sales and marketing
• Management information systems
• Managements structures and roles
• Location
• Financial module
• An action plan
• A review process

If in the preparation of your strategic plan one of the key issues for you is survival in the climate which we find ourselves then some of the following points will need critical attention.

Thinking Cash and The Cash Flows Your Business Will Need

A detailed cash flow statement for the next twelve months should be drawnup and reviewed at least monthly to see if the targets are being achieved.

Banking Facilities

Know the levels which are going to be required and be open with your finance provider. If necessary look at alternative providers which can assist with certain areas of the business.

Cost Reduction Programme

Be willing to take decisive action and review all costs of the business. Have the right business model for the market condition you find yourself in.

Staff Knowledge

Keeping employees informed of the status of the business is crucial.

Managing Risk and Uncertainty

Do we know what the main risks to the business are and what is the likely impact of a sudden hit?

Look Ahead

Do not just focus on the here and now. There will be opportunities once survival has been achieved.

In other words you will have clarified where you are now, where you want to go, and how you might get there particularly in the climate we find ourselves today.

The preparation of a new strategic plan should give you the confidence about the future of your business and your personal targets – a confidence that will inspire and motivate you and others around you.

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